Will FedEx Stock Rebound To Its Pre-Inflation Shock Level of Over $300?

+4.23%
Upside
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Market
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Trefis
FDX: FedEx logo
FDX
FedEx

FedEx stock (NYSE: FDX) currently trades at $262 per share, 8% below the level seen in March 2021, and it has little room for growth, in our view. FDX stock was trading at around $227 in early June 2022, just before the Fed started increasing rates, and is now 15% above that level, compared to 14% gains for the S&P 500 during this period. The rally in the stock over recent months has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession.

Interestingly, FDX stock has had a Sharpe Ratio of 0.3 since early 2017, lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Returning to the pre-inflation shock level of over $316 (seen in May 2021) means that FDX stock will have to gain more than 20% from here, and we think it could materialize over time. However, we estimate FedEx’s valuation to be around $281 per share, just 7% above its current market price.

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Our detailed analysis of FedEx’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock
Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
  • April 2021: Inflation rates cross 4% and increase rapidly.
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
  • Since August 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how FDX stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

FedEx and S&P 500 Performance During 2007-08 Crisis

FDX stock declined from nearly $106 in September 2007 (pre-crisis peak) to $43 in March 2009 (as the markets bottomed out), implying it lost almost 60% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $83 in early 2010, rising 93% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

FedEx’s Fundamentals Over Recent Years

FedEx’s revenue increased from $69 billion in fiscal 2020 (fiscal ends in May) to $90 billion in fiscal 2023, partly due to increased shelter-in-place restrictions and the spread of the Covid-19 virus, resulting in e-commerce growth. However, the sales growth has slowed in recent quarters due to a weakening consumer spending environment. For perspective, FedEx saw its average daily package volume decline by 10%, 7%, and 11% for its Express, Ground, and Freight segments in 2023, respectively. FedEx’s operating margin expanded from 3.3% in 2020 to 6.6% in 2023, partly due to increased pricing and surcharges. Our FedEx’s Operating Income Comparison dashboard has more details. The company’s earnings stood at $15.60 on a per-share and reported basis in 2023, compared to the $4.92 figure in 2020.

Does FedEx Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

FedEx’s total debt increased from $36 billion in 2020 to $38 billion now, while its cash has increased from $5 billion to around $7 billion over the same period. The company also garnered $9 billion in cash flows from operations in 2023. FedEx has high debt levels, but with its cash cushion, it appears to be in a good position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe FedEx stock has the potential for more gains once fears of a potential recession are allayed. That said, unfavorable macroeconomic factors, weak consumer demand, and high debt levels are potential risk factors for realizing these gains.

While FDX stock appears to have little room for growth, it is helpful to see how FedEx’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

 Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 FDX Return 0% 51% 41%
 S&P 500 Return -4% 13% 93%
 Trefis Reinforced Value Portfolio -6% 23% 534%

[1] Month-to-date and year-to-date as of 9/22/2023
[2] Cumulative total returns since the end of 2016

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